Rights issue can make share price quite volatile. These factors determining market price action post rights issue can be beneficial for you.
Rights issue is a great way to accumulate more funds from existing shareholders. These funds are then ultimately used for one or more business purposes such as project expansion, debt reduction, strengthening balance sheet, increase working capital & many more.
In rights issue, additional new shares are offered usually at an attractive discount to existing shareholders in proportion to their shareholdings on record date. Therefore, fresh equities of underlying company are introduced in the market.
This will in turn increase volatility of the shares of underlying company on either side of subscription price. Here are 10 factors impacting share price action after rights issue:
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(1) Authentic Reasons Behind The Issue Of Rights Shares
It is one of the most common factors determining market price action post rights issue. Every issue including rights issue has certain reasons for raising funds for the company. It is usually described by the firm in its Letters of Offer that is submitted to the stock exchange regulator i.e. SEC in US & SEBI in India.
Shareholders can gain valuable insight about a particular rights issue from company’s Letters of Offer. It describes one or more reasons to utilize the proceeds from a rights issue.
Sometimes, the real reasons behind the rights issue may differ from what is stated in the Letters of Offer submitted by the company. Investors need to be vigilant enough to identify those hidden reasons to determine expected price trend after the issue.
Some of the common reasons behind a company’s rights issue include project expansion, retiring debt, promising acquisitions, augmenting working capital, research & development, land acquisitions, & many more.
Once main objective along with its proportion in the raised funds is clear, one can determine market price action after the issue up to a great extent. Although, stock price may adjust to new levels due to increase in number of shares but then it will proceed depending on the real reasons behind the issue.
If the use of money seems to be a good idea & appears valuable for investors then share price is likely to rise after initial adjustments. However, if the stated reasons for the issue are not satisfactory then share price is likely to see further downtrend.
- Factors Determining Market Price Action Post Rights Issue: Shutterstock